Published on November 11th, 2013 |
by Tanya Silverman
Image © Roberto Stuckert 2013
The BRICS: Banking on Success?
Following my last post on the U.S. government shutdown I came across some developments in the advancement of the BRICS bank. Subsequent speculation that the U.S. may scale back its key economic stimulus programs was a driver into pushing for the new development bank to open its doors quicker. The bloc of countries that have come headstrong into the international arena are keen to get going, and Russia’s finance minister promises the project will commence in 2015.
This is when I started looking into the BRICS a little more, considering their development and their promise of being the world’s strongest emerging markets. How could they play a part in changing an apparently-solidified international system? Four years ago Russia’s president Medvedev said that ‘BRIC should create a more just world order.’ I knew a bit about the BRICS already, like most of us do, and I had heard about the potential of a BRICS bank, but I wanted to investigate it a little further, especially because the implication of potential change in the current world system tickles my interests. Even though we’re all familiar with the BRICS at some level it’s important to get back to basics.
BRIC was a term coined by Goldman Sach’s Jim O’Neil in 2001 encompassing the up-and-coming economies of Brazil, Russia, India, and The People’s Republic of China. Most recently South Africa has been added to the list. Thus we have BRICS (sounds a lot better, too). This collective of countries have been witness to very promising growth rates (although projected growth has slowed). This being the case the BRICS are obviously aware of their growing power – and with great power comes great responsibility. Together they’ve decided to make the most of their global reputations and as a result of dissatisfaction at the ‘voice and vote’ method of dealing with issues within major financial institutions, such as the IMF and World Bank, and an unwillingness of OECD (Organisation for Economic Cooperation and Development) donors to recapitalise the multinational development banks. They agreed to ‘advance the reform of international financial institutions so as to reflect the changes in the global economy.’ This was the impetus for the blueprint of a BRICS multilateral development bank, which they believe is ‘feasible and viable.’ The proposal was cleared and plans began following the Durban Summit earlier this year.
The initial idea was proposed in India last year; however the philosophies behind it can be drawn from earlier ideas of the Non-Aligned Movement’s 1955 Bandung Conference. It was here the principles of non-interference and territorial integrity were established in the face of the Cold War. The only conditionality was some aspects of tied aid. This is where the foundational concept of the BRICS bank shines through. Like traditional donors (members of the IMF and World Bank), the BRICS provide assistance and the means to increase global presence (their own, and the countries they assist). Also like traditional donors the BRICS share foreign policy objectives. However, the BRICS consider themselves to be ‘developing partners’ not ‘aid givers.’ The three main goals that the bank would hope to achieve are: responding to developing countries’ needs and not the priorities of the lenders; financing infrastructure projects that are largely ignored by the private sector, and infrastructure projects to support an increased standard of living for all; and filling the gaps in financing, including access to finance for medium and small enterprises. Ambitious? Yes. Feasible and viable? Maybe – but it all depends on how much the member countries can pool together for the successful establishment of this bank, and also crucially depends on the structure and functioning of the institution. Let’s elaborate.
In 2001 the Financial Times reported that from 2009-2010 the People’s Republic of China lent more to the poorest states than the World Bank. China is the largest player, lending $4- $25 billion annually. India is the second largest donor at $650 million- $2.2 billion, Brazil stands at $400 million to $1.2 billion, Russia averages $500 million, and South Africa reaches $150 million. However, this is not to imply that the BRICS have only recently begun to engage with their developing partners. China has been the longest standing provider of foreign assistance starting in 1950, Russia since 1955, Brazil from 1960, and South Africa began in 1968.
As I’ve already mentioned they each have foreign policy objectives. These objectives may not be entirely transparent, but by looking at the nations they provide foreign assistance to, we can see the political and economic ties that are strengthening in the international system. China focuses on Africa and its neighbours in Asia, extending assistance in infrastructure, industrial, and energy development through bilateral aid projects and technical cooperation, and debt relief. Brazil also has ties with Africa, but focuses on its neighbours in Latin American and Portuguese speaking countries in aid of education, health, and agriculture via co-financed projects and technological cooperation, emergency assistance, and debt relief. India concentrates on its geographical neighbours in Bhutan, Nepal, and Afghanistan. It is also beginning to look to Africa increasingly in aid for IT, capacity building, and infrastructure.
While it all sounds pretty good so far, and the BRICS seem committed to helping their developing neighbours, some concerns have been expressed. When the proposal was solidified earlier this year economists and sceptics pointed out a number of financial issues that would prevent the five member countries from donating equal amounts to the initial corpus of China’s proposed collective $100 billion. This sum would be for the bank’s ‘Contingent Reserve Arrangement’ to assist the members in counteracting future financial shocks (e.g. the potential scares of the US shutdown as discussed in my previous blog). Realistically only China could and can afford to deposit such large sums into the booty as its market value is far higher than the other four nations combined. Russia has had problems with its internal financing as of late and Brazil, India, and South Africa are struggling to keep up their promising growth rates. People predicted that China would be the primary funder of the project, and they were right. China’s part of the pool stands at $41 billion, compared to $18 billion each from Brazil, India and Russia, and $5 billion from South Africa.
China has deposited the largest sum into the kitty – but why is that cause for concern? The Bretton Woods institutions (again, the IMF and World Bank) work on a strict voting function. Critics worry that this voting function will be imitated by the BRICS bank members. Voting power in the IMF varies country-to-country depending on fund resources. The IMF website states that ‘voting shares will change as eligible members pay their quota increases.’ For example in 2011the U.S. held 16.75% of the voting total. By comparison Brazil held 1.72%, Russia 2.39%, India 2.32%, China 3.81%, and South Africa just 0.77%. The concern therefore is that China, with the highest monetary deposit into the BRICS development scheme, will play the U.S. in the new institution and gain the largest percentage of voting power. If this does become the case the new world bank would be considered a failure due to its replication of the characteristics of the already-established major development financial institutions.
There could, and likely would, be conflicting interests between the BRICS members. We can already see that aside from the commonality of assisting Africa financially, the BRICS each tend to their immediate neighbours first and foremost. Furthermore, although the BRICS have agreed to focus on infrastructure investment in developing countries, they each have very different economic structures that could reflect in future disagreements. China relies primarily on manufacturing, India on services, and Russia and Brazil rely heavily on commodities. In fact, Dani Rodrik (Professor of Social Science at the Institute of Advanced Study) writing for Social Europe, states that ‘just about the only thing these countries have in common is that they are the only economies ranked among the world’s 15 largest […] that are not members of the OECD.’
Whilst Rodrik thinks that it is positive there is a lot of dialogue and communication between the BRICS, he purports that is disappointing that they have chosen to focus on infrastructure finance as their main area of partnership, fearing that this is representative of a 1950s world view of economic development (perhaps not reflecting the ‘new’ world order Medvedev was hoping for). Furthermore he believes that the constraints of the bank will be poor governance and market failures. Instead he purports what the world needs from the BRICS is not a development bank, but greater leadership. Regardless of having less power in financial institutions, the BRICS do have a voice in geopolitical issues. The G8 has been replaced by the G20, shifting the global balance of power and giving the BRICS an opportunity to speak up.
Further negative impacts could be that the BRICS bank might increase recipient’s debt levels, and ignore the social and environmental impacts of pushing development. For example the World Bank approved the Greater Beirut Supply Project in Lebanon in 2010. The project aimed to provide water from the Litani and Alawi rivers to residents in Greater Beirut. However, the project has now been blamed for a rise in water pollution and deficiency of other areas in need of development. Commentators are concerned that issues like this will persist under the BRICS.
Whilst they may focus on extracting resources for and from their development partners, they may not provide benefits such as local jobs. Fatima Shaibodien, Action Aid director in Africa, expresses concerns with the BRICS: ‘If this new BRICS bank is going to operate like the World Bank we don’t think it will work, it needs to have completely different development ideology, a new value system than the World Bank. We can look at the countries in the continent to see that it does not work. In fact it deepened poverty it create more inequality, infrastructure on its own is not a magic bullet. It doesn’t help the poor community if they can’t access that infrastructure.’
Commentators also express that a BRICS bank could result in the erosion of progress and communication that has already been made with traditional aid donors. In addition, none of the BRICS provide official aid data as of yet, and are unlikely to join the DAC (Development Assistance Committee) which is a branch of the OECD, especially as they are not, as aforementioned, members of the OECD.
As the solidification of the BRICS bank draws closer there are still a lot of questions that are yet to be answered. Will the BRICS development bank be any different to the leading institutions? Will China have a higher percentage of voting rights? Finally, and most simply, will the project be successful? These are answers that will only come in time. What we do know is that the World Bank has some competition for the first time – and competition is healthy, right?